Analysis on Malaysian Non-Performing Loans and Financing Sale, Effects of Covid-19 and its Legal and Regulatory
Framework
Premjit Singh Kolwant Singh1*
1 Ahmad Ibrahim Kulliyah of Law, International Islamic University Malaysia, Kuala Lumpur, Malaysia
*Corresponding Author: [email protected] Accepted: 15 June 2022 | Published: 30 June 2022
DOI:https://doi.org/10.55057/ijaref.2022.4.2.1
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Abstract: With Covid-19 banking and financial relief measures coming to an end, it is viewed that there will be a growth trend and change in Malaysia moving forward surrounding financial institutions behaviour in dealing with their non-performing assets including disposing their non-performing loans and non-performing financing comprising of both unsecured and secured products by way of sale and purchase to third parties. The purpose of this article is to analyse the market trends in disposing non-performing loans and non- performing financing by way of sale and purchase to third parties in Malaysia during the last several years taking into consideration all Covid-19 moratoriums measures and relaxing on the underwriting process by financial institutions. The article will examine the prevailing legislations and regulations that governs the sale activity as well as considering the recent Financial Sector Blueprint 2022-2026. The author intends to adopt a multi-method research strategy primarily doctrinal legal research as well as qualitative research approach. This article aims to contribute to the legal fraternity and people in general with an overview of the current position in Malaysia.
Keywords: Non-Performing Loans, Non-Performing Financing, NPL, Banking Law, Malaysia ___________________________________________________________________________
1. Definition of Non-Performing Loans and Non-Performing Financing (“NPLs”)
In the academic and official sector literature, NPLs is a widely used indicator in determining and accessing creditworthiness of financial institutions in general. Practically, NPLs occurs in the circumstance when a borrower of a loan of any kind of a banking product, including but not limited to, personal loans, credit cards, mortgage, hire purchase and small medium enterprise business loans, is in default on the basis that the borrower have missed the agreed scheduled payments for a period of time. This covers both types of banking products - conventional and Islamic loans products.
NPLs definitions adopted differs across jurisdictions and there is no uniformity in the definition across banking regulations from a global perspective. Hence, as a result, several key global institutions have taken the lead in issuing guidelines and frameworks on identifying and categorising NPLs. The purpose and objective are to internationally synchronise and harmonise NPL definition to enable a unilateral criteria in measuring asset quality in the banking environment.
1.1 European Banking Authority – NPL Definition
The European Banking Authority (“EBA”) is an independent European Union authority which works to ensure effective and consistent prudential regulation and supervision across the banking sector in Europe. In essence, EBA’s key objective and task is to ensure a stable financial sector is maintained and to safeguard the integrity, efficiency, and functionality of the banking sector in Europe.1 Given its mandate and objectives, EBA contributes significantly towards the creation of the European Single Rulebook for the banking industry.
Historically, it is observed that different interpretations on NPL definition was adopted across the European Union leading to legal uncertainties. Consequently, the European Union and EBA opined that it is crucial for each national jurisdiction within the European Union to apply the same definition of regulatory aggregates and the same methodologies including but not limited to capital ratios and liquidity standards which extends to NPLs.2
The Commission Implementing Regulation (EU) No 680/2014 was issued by EBA on 16 April 2014 and amended Implementing Regulation (EU) 2015/227 in January 2015 which laid down implementing technical standards with regards to supervisory reporting of institutions in accordance to Regulation (EU) No 575/2013 of the European Parliament and of the Council.
Annex V of the Commission Implementing Regulation (EU) No 680/2014 on Supervisory Reporting particularly states that non-performing exposures are those that satisfy either or both of the following criteria:
i. Material exposures which are more than 90 days past due;
ii. The debtor is assessed as unlikely to pay its credit obligation in full without realisation of collateral, regardless of the existence of any past due amount or of the number of the days past due.3
In order to ensure that the definition is binding on all European union members states, EBA issued The Final Report – Guidelines on management of Non-Performing and Forborne Exposures4 which expressly provides that the definition of non-performing exposure shall continue to remain as stated in Annex V of the Commission Implementing Regulation (EU) No 680/2014 on Supervisory Reporting.
1.2 Basel Committee – NPL Definition
Bank for International Settlements (“BIS”) has over the decades since its establishment in 1930 engage in an active mission to support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks. BIS is owned collectively by 63 central banks including Bank Negara Malaysia, representing countries that together account for about 95% of the world’s gross domestic product.
There are various committees established as part of BIS to ensure their mission as a going concern is met. The Basel Committee on Banking Supervision plays a crucial role in establishing quality banking supervision worldwide.
1 https://www.eba.europa.eu/about-us/eba-at-a-glance
2 https://www.eba.europa.eu/regulation-and-policy/single-rulebook
3 Paragraph 145 Annex V Reporting on Financial Information, Commission Implementing Regulation (EU) No 680/2014, 16 April 2014.
4 The Final Report – Guidelines on Management of Non-Performing and Forborne Exposures, EBA/GL/2018/06, 31 October 2018.
In April 2017, Basel Committee issued Guidelines on Prudential treatment of problem assets – definition of non-performing exposures and forbearance under Section 3 provides that NPLs shall be defined as the following:
i. The bank considers that the obligor is unlikely to pay its credit obligations in full, the obligor is past due more than 90 days on any credit obligation to the banking group; or ii. All exposures that are credit-impaired (in the meaning of exposures having experiences
a downward to their valuation due to deterioration of their creditworthiness); or iii. All other exposures that are not defaulted or impaired but nevertheless:
a) Are material exposures that are more than 90 days past due; or
b) Where there is evidence that full repayment based on the contractual terms, original or, when applicable, modified is unlikely without the banks realisation of collateral, whether or not the exposure is current and regardless of the number of days the exposure is past due.5
1.3 International Monetary Fund – NPL Definition
International Monetary Fund (“IMF”) was formalised in July 1944 at the United Nations Bretton Woods Conference in New Hampshire, United States of America. The countries in attendance at the conference was in consensus to build an institution for international economic cooperation. The primary mission of IMF is to ensure stability of the international monetary system and framework as well as the system on currency exchange rates and cross-border payments across jurisdictions.
At present day, IMF consist of 190 nations, including Malaysia, collectively working together with a mission to foster a global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the globe.
IMF most recent Financial Soundness Indicators Compilation Guide issued in 2019 defined non-performing loans as:
i. Payments of interest or principal are past due by 90 days or more; or
ii. Interest payments equal to 90 days or more have been capitalised or delayed by agreement; or
iii. Evidence exists to reclassify a loan as non-performing even in the absence of a 90-day past due payment, such as when the debtor files for bankruptcy.6
1.4 Malaysia – NPL Definition
The Central Bank of Malaysia, Bank Negara Malaysia, in its most recent guideline7 issued on 6 April 2015 stipulates that banking institutions must classify a loan and/or financing as an NPL under the following circumstances:
i. where the principal or interest/profit or both is past due for more than 90 days or 3 months. In case of credit card facilities, the amount past due refers t othe minimum monthly repayment;
ii. revolving credit facilities shall be classified as NPL when the outstanding amount has remained in excess of the approved limit for a period of more than 90 days or 3 months;
5 Committee on Banking Supervision, B. (2017). Basel Committee on Banking Supervision Guidelines Prudential treatment of problem assets-definitions of non-performing exposures and forbearance Guidelines for definitions of non-performing exposures and forbearance iii. www.bis.org
6 Financial Soundness Indicators Compilation Guide, International Monetary Fund, 2019.
7 Classification and Impairment Provisions for Loans/Financing, issued 6 April 2015, BNM/RH/GL/007-17.
iii. where the amount is past due or the outstanding amount has been in excess of the approved limit for 90 days or 43 months or less, the loan/financing exhibits weaknesses that render a classification appropriate according to the banking institution’s credit risk grading framework; or
iv. where repayments are scheduled on intervals of 3 months or longer, the loan/financing shall be classified as NPL as soon as default to the repayment terms occurs, with an exception that the borrower does not exhibit any weakness that would render it classified as an NPL in accordance to the banking institution’s credit risk grading framework.8 2. Historical NPL Sales in Malaysia
Pursuant to The World Bank data, average NPLs ratio in Asia for the financial year of 2019 based on 24 countries stood at 4.65% on average and the ratio for the financial year of 2018 based on the same 24 countries was at 4.25%.9 It is observed that NPLs ratio in Malaysia is on a two consecutive financial year rise, with the ratio in 2018 being 1.48% and 1.53% in 2019 respectively.10 As of March 2021, Malaysia NPLs ratio stood at 1.6%, thus an obvious trend of increase may be established.11
Despite more than a decade has passed since the 1997 global financial crisis and arguably the currency and financial situation has stabilized; the expansion of NPLs continues unabated in major Asian countries which includes Malaysia. However, it is important to note that each Asian country had put in place specific instruments and mechanisms in order to facilitate and improve their respective banking institutions and legal systems. In Malaysia particularly, the structure deployed by the government in order to deal with the financial reconstruction included the establishment of two quasi-governmental agencies, Danaharta Nasional Berhad to purchase NPLs and Danamodel Nasional Berhad to inject public funds.12 Over the years, it is viewed that these measures are insufficient to radically improve the disposal of NPLs and the risk that delays in the disposal process.
It is observed that NPL sale in Malaysia by banks is not a common practice in comparison to regional peers. NPL sales as a bad debt resolution channel has not been popular in Malaysia in the past decade since the Malaysian banking sector’s asset quality has been on a consistent recovery since the 1997/98 Asian financial crisis and, hence, the overall size of the Malaysian NPL market — at a yearly average of RM25 billion to RM30 billion over the last 10 years prior to Covid-19 — is not large. With a low NPL ratio of below 2% and limited NPL pressures, local banks were not in a rush to sell NPLs to third parties as those disposals are generally perceived as selling with deep haircuts compared with banks’ own in-house NPL recovery.
Instead, NPL write-offs are also more preferred, in general, given the tax benefits. The written- off NPL will be tax deductible, thus positive to net profit. Even prior to the last decade, there were no large disposals of Malaysian NPLs. Between 2005 and mid-2012, NPLs sold by banks amounted to less than RM3 billion, according to past data by Bank Negara Malaysia.13
8 Ibid.
9 Non-performing loans in Asia
https://www.theglobaleconomy.com/rankings/Nonperforming_loans/Asia/
10 Ibid.
11 Malaysia Non Performing Loans Ratio
https://www.ceicdata.com/en/indicator/malaysia/non-performing-loans-ratio
12 Kenichi Takayasu, Yosie Yokoe, Non-performing Loan Issue Crucial to Asia’s Economic Resurgence, Sakura Institute of Research, Inc., June 199, No. 44
13 Adeline Paul Raj, “NPL Sales to Pick Up Steam in Malaysia”, 27 April 2021, The Edge Malaysia https://www.theedgemarkets.com/article/npl-sales-pick-steam-malaysia
CIMB however may have started the ball rolling in Malaysia by disposing a small portion of their NPL through a sale to a third party. Other than CIMB, the most recent transaction of an NPL sale by a local lender was in early 2019 when AMMB Holdings Bhd sold NPLs from its two subsidiaries, AmBank (M) Bhd and AmBank Islamic Bhd, to Aiqon Capital Group Sdn Bhd for RM553.91 million. It was AMMB’s first such sale since 2007 and it made a net gain of RM229.94 million from it.14
MBSB Bank Berhad in 2018 announced that it had plans to sell a total of RM 600 million worth of NPLs to third parties in order to reduce its current NPL ratio to below 4%.15
It may be viewed that NPL sales in Malaysia have been sporadic in comparison to other matured markets such as in Europe where disposal of NPLs to third parties has been used as successful tool to deleverage banks balance sheets, with more than USD 850 billon (RM3.54 trillion) NPL portfolio sale transaction was recorded between 2017 to 2021.16
3. Covid-19 Impact
Covid-19 pandemic poses many unprecedented challenges around health, economic, and financial stability issues. In tackling the pandemic by ensuring lives are protected and allowing healthcare systems and facilities to cope have required many measures to be implemented including isolations, various series of lockdowns and closures in hopes to ultimately slow the spread of Covid-19 virus.
The outbreak of the Covid-19 pandemic in the first quarter of 2020 has led to a series of unprecedented emergency measures being introduced by various jurisdictions including Malaysia which includes borrower relief programs. During this period, NPLs aggregate ratios have generally remained stable considering the relief programs, however it is anticipated that borrower distress will inevitably translate into fresh NPLs upon expiry of such relief programs such as moratoriums.17 Due to the various measures offered, according to Maybank Kim Eng Research, loan moratoriums impose critical risks on the financial institutions system in ASEAN and needs to be monitored very closely. The research finds that even if merely 10% of such loans under moratoriums goes bad, NPLs in the region could be significantly impacted. During the moratoriums, interest and principal payments are on pause and these loans are not classified as NPLs, which leads to a shadow asset category and increases risks.18
Despite the usual market practice in Malaysia, Collectius Group and Aiqon Capital Group as key NPL acquiring firms with the former being the largest in Southeast Asia and the latter in
14 Adeline Paul Raj, “NPL Sales to Pick Up Steam in Malaysia”, 27 April 2021, The Edge Malaysia https://www.theedgemarkets.com/article/npl-sales-pick-steam-malaysia
15 Ng Min Shen, “MBSB Bank on track to RM1b Islamic portfolio”, 26 June 2018, the Malaysian Reserve https://themalaysianreserve.com/2018/06/26/mbsb-bank-on-track-to-rm1b-islamic-porfolio/
16 Asila Jalil, “Deloitte: Banks’ NPL ratio will rise once repayment aid ends”, 24 June 2021, The Malaysian Reserve
https://themalaysianreserve.com/2021/06/24/deloitte-banks-npl-ratio-will-rise-once-repayment-aid-ends/
17 World Bank Group, Finance Sector Advisory Center (FinSAC), “Covid-19 and Non-Performing Loan Resolution in the Europe and Central Asia Region”, Policy Note, December 2020.
18 Leong Hung Yee, “Moratoriums pose risks to banking systems in ASEAN”, 4 February 2021, The Star.
https://www.thestar.com.my/business/business-news/2021/02/04/moratoriums-pose-risks-to-banking-systems- in-asean
Malaysia expects an increase in NPL sales among some of the Malaysian banks following the Covid-19 pandemic.19
Based on data released by Bank Negara Malaysia, NPLs in fact recorded a nine-year high of Ringgit Malaysia 28.7 billion at the end of 2020. The increase arose dramatically from Ringgit Malaysia 24.9 billion in September 2020 to Ringgit Malaysia 25.7 billion in October and Ringgit Malaysia 27.8 billion by December 2020. The last time NPL recorded such significant increase was in 2011.20
It is viewed that the NPLs ratio is Malaysia is expected to raise more than two folds up to 4 percent by 2022 financial year.21
Deloitte Malaysia opined that local banks in Malaysia are well capitalised with low NPL levels and credit costs, and having in place sufficient capital buffers despite the effects of the Covid- 19 pandemic. This has led to Bank Negara Malaysia maintaining its Overnight Policy Rate at 1.75% since July 2020 and compressed interest incomes for banks.22
Deloitte further noted that the extent of NPL ratio increase will primarily be driven once all moratoriums and financial assistance ends. Although Malaysian banks have made additional loan loss provisions to deal with deteriorating loan asset quality, the full extent of the consequences of the pandemic-induced credit risk has yet to emerge.23
International Finance Corporation is in the view that high level of NPLs may become a major problem in emerging economies, stalling credit flow and impending growth. Hence, resolving NPLs is even more critical to maintain efficiency in intermediation for the financial sector. As NPLs are resolved, economic recovery may pick up pace, helping financial institutions in Asia to unlock their capital and encourage new lending to local businesses and households.24 In order to ensure lenders stay ahead of its peers and on track of recovery post Covid-19 pandemic, Deloitte is in the view that banks may reduce their NPL ratio by conducting portfolio sale.25 4. Malaysian Legal Framework on the Sale of NPLs
The core legislation governing the sale and purchase of NPL in Malaysia by financial institution is the Financial Services Act 2013 (“FSA”) and the Islamic Financial Services Act
19 Adeline Paul Raj, Banks Keen on Selling NPLs, but deals likely only from 2022, 25 May 2021, The Edge Malaysia
https://www.theedgemarkets.com/article/banks-keen-selling-npls-deals-likely-only-2022
20 Syahirah Syed Jaafar, Joyce Goh, Impaired Loans Creep up to Nine-Year High, 5 February 2021, The Edge Malaysia
https://www.theedgemarkets.com/article/impaired-loans-creep-nineyear-high
21 Adeline Paul Raj, “Malaysia’s problem loans expected to rise, but not as bad as regional lenders”, 2 November 2020, Edge Weekly
https://www.theedgemarkets.com/article/malaysias-problem-loans-expected-rise-not-bad-regional-lenders
22 Supra at 16.
23 Ibid.
24 Rosy Khanna, International Finance Corporation FIG Industry Director for Asia and Pacific, “IFC and Collectius launch the first distressed asset recovery platform to address the impacts of Covid-19 on the banking sector and consumer finance in East Asia Pacific”, 16 September 2020.
25 Supra at 16.
2013 (“IFSA”). In addition, Bank Negara Malaysia issued guidelines on the disposal and purchase of NPLs by financial institutions.26
Section 100 FSA and Section 112 IFSA respectively states that “No person shall enter into an agreement or arrangement for a scheme to transfer the whole or any part of the business of a licensed person, except with the prior written approval of the Bank”27. Due to wide scope of the wordings used in the FSA and IFSA respectively, Bank Negara Malaysia, issued a policy on 5th August 2016 clarifying amongst others that impaired loans or financing that are subject to the Guidelines on the Disposal/Purchase of Non-Performing Loans by Banking Institutions issued by Bank Negara Malaysia on 28 December 2005 and the Guidelines on the Disposal/Purchase of Non-Performing Financing by Islamic Banks issued by Bank Negara Malaysia on 29 June 2007 requires specific approval from Bank Negara Malaysia.28
Further, the 2005 and 2007 guidelines issued by Bank Negara Malaysia29 sets out certain requirements that must be satisfied by any financial institution proposing to dispose their NPL.
The primary requirements include the following:
i. Financial institutions may only sell to locally incorporated companies which the purchaser is majority owned by domestic shareholders as the purchaser is subject to a foreign equity cap of 49%;
ii. Financial institutions are required to undertake necessary measures to communicate to the borrower of the sale of the NPLs;
iii. The sale must not contravene Banking and Financial Institutions Act 1989;
iv. The sale does not affect any debt restructuring agreements.
Pursuant to Section 100(3) FSA and Section 112(3) IFSA respectively, an application for Bank Negara Malaysia approval must be supplemented with the following information and documentation:
(a) To be furnished by the transferor:
i. Approval from the transferor’s board for the proposed business transfer scheme;
ii. Details of the proposed business transfer scheme, including a description of the purpose of the scheme, the assets and liabilities to be transferred, their values and the purchase considerations;
iii. A report on the assessment made, and relevant mitigation measures proposed, by the transferor on the effect of the proposed business transfer scheme on the interests of any person likely to be affected by the scheme;
iv. where applicable, a valuation report on the liabilities to be transferred, prepared by the appointed actuary of the licensed insurer or licensed takaful operator;
v. where applicable, the assessment by the Islamic financial institution’s Shariah Committee that the business transfer scheme is undertaken in accordance with Shariah requirements; and
vi. any other information as may be required by the Bank.30
26 Guidelines on the Disposal/Purchase of Non-Performing Loans by Banking Institutions, 28 December 2005 and Guidelines on the Disposal/Purchase of Non-Performing Financing by Islamic Banks, 29 June 2007.
27 Section 100 Financial Services Act 2013 and Section 112 Islamic Financial Services Act 2013.
28 Transfer of Business Policy, Bank Negara Malaysia, 5 August 2016, BNM/RH/PD 019-10
29 Supra at 26.
30 Supra at 28.
(b) To be furnished by the transferee:
i. approval from the transferee’s board for the proposed business transfer scheme;
ii. where the transferee is a licensed person, a report on the assessment made by the transferee on the –
(A) risks associated with the business to be acquired and potential impact to the transferee’s financial condition; and
(B) readiness of its existing infrastructure and resources to manage the business to be acquired;
iii. where the transferee is not a licensed person, details of its shareholding structure depicting legal and beneficial ownership, source of funding for the scheme and information on the board and senior management;
iv. for transfers of insurance policies or takaful certificates, an acknowledgement that the transferee will assume liability for claims which have been incurred but not yet reported; and
v. any other information as may be required by the Bank.31
Upon receiving the application together with all supporting information and documentation, Bank Negara Malaysia shall in accordance with Section 100(6) and (7) FSA or Section 112(6) and (7) IFSA, as the case may be, either approve, with or without conditions, or reject the application and the decision must be communicated to the transferor and transferee in writing.
Although the application and approval of Bank Negara Malaysia is essentially only a routine procedure, it is viewed that it may cause delays to a commercial transaction and may be inefficient once the market moves towards more NPL sale and purchase as anticipated post Covid-19.
Subject to the fulfilment of the 2005 and 2007 guidelines issued by Bank Negara Malaysia32 and securing the approval of Bank Negara Malaysia to affect the sale, the transferor in accordance with Section 101(1) FSA and Section 113(1) IFSA respectively is required to publish in the Gazette a notice stating its intention to make the application to the High Court for confirmation of the business transfer scheme.33 Further, Bank Negara Malaysia may require additional steps to be undertaken by the transferor in relation to the notice requirement to carry out the business transfer scheme and may require the following:
i. persons to whom, and when such notices shall be given;
ii. the form or manner of the notices to be given; and
iii. the period within which a person specified under paragraph (i) above may object to the proposed scheme.34
As a next step, the transferor and transferee may proceed to make an application to the High Court and ensuring a copy of the application and all supporting documents is delivered to Bank Negara Malaysia.35 The essence of sharing the application and supporting documents with Bank Negara Malaysia despite obtaining prior approval is on the basis that Bank Negara Malaysia pursuant to FSA and IFSA is entitled to be heard in the court proceedings pertaining
31 Ibid.
32 Supra at 26.
33 Section 101(1) Financial Services Act 2013 and Section 113(1) Islamic Financial Services Act 2013.
34 Section 101(2) Financial Services Act 2013 and Section 113(2) Islamic Financial Services Act 2013.
35 Section 103(1) Financial Services Act 2013 and Section 115(1) Islamic Financial Services Act 2013.
to the application and Bank Negara may during the proceedings propose any modification to the scheme.36
Typically, the transferor and transferee may apply for all or part of the following orders from the High Court:
i. for the transferor’s rights and title to the assets to be transferred to the transferee under a business transfer scheme without the need to effect the transfer of rights and titles to each asset individually;
ii. in relation to a banking or an investment banking business transfer scheme, for any account between the transferor and its customer to become an account between the transferee and the customer, subject to the same conditions and incidents existed between the transferor and its customer, and such account to be deemed for all purposes to be a single continuing account;
iii. in relation to an insurance business transfer scheme, for the transferee to be fully responsible for liabilities transferred by the business transfer scheme whether arising out of policies or otherwise as though the liabilities were originally assumed by the transferee without the need for the transferee to confirm each liability individually;
iv. for any existing instrument, whether in the form of a deed, will or otherwise, or order of any court, under or by virtue of which any property became vested in the transferor, to be construed and to have effect as if for any reference therein to the transferor there were substituted a reference to the transferee;
v. for any existing agreement to which the transferor was a party to have effect as if the transferee had been a party thereto instead of the transferor;
vi. for any existing instruction, order, direction, mandate, power of attorney, authority, undertaking or consent, whether or not in relation to an account, given to the transferor, either alone or jointly with another person, to have effect, in respect of anything due to be done as if given to the transferee either alone or, as the case may be, jointly with the other person;
vii. for any negotiable instrument or order for payment of money drawn on, or given to, or accepted or endorsed by, the transferor or payable at the office of the transferor, whether so drawn, given, accepted or endorsed before, on, or after, the transfer date, to have the same effect on and from the transfer date, as if it had been drawn on, or given to, or accepted or endorsed by, the transferee or were payable at the office of the transferee;
viii. for the custody of any document, goods or thing held by the transferor as bailee immediately before the transfer date to pass to the transferee and the rights and obligations of the transferor under any contract of bailment relating to any such document, goods or thing to be transferred to the transferee;
ix. for any security held immediately before the transfer date by the transferor, or by a nominee of, or trustee for, the transferor, as security for the payment or discharge of any liability of any person, to be held by the transferee or, as the case may be, to be held by that nominee or trustee as the nominee of, or trustee for, the transferee, and to the extent of those liabilities, be available to the transferee as security for the payment or discharge of those liabilities; and where any such security extends to future advances or future liabilities, to be held by, and to be available as aforesaid to, the transferee as security for future advances by, and future liabilities to, the transferee in the same manner in all respects as future advances by, or future liabilities to, the transferor were secured thereby immediately before the transfer date;
36 Section 103(2)&(3) Financial Services Act 2013 and Section 115(2)&(3) Islamic Financial Services Act 2013.
x. where any right or liability of the transferor is transferred to the transferee, for the transferee to have the same rights, powers and remedies (and in particular the same rights and powers as to taking or resisting legal proceedings or making or resisting applications to any authority) for ascertaining, protecting or enforcing that right or resisting that liability as if it had at all times been a right or liability of the transferee, including those rights or liabilities in respect of any legal proceedings or applications to any authority pending immediately before the transfer date by or against the transferor;
xi. any judgment or award obtained by or against the transferor and not fully satisfied before the transfer date to be enforceable by or, as the case may be, against the transferee; and xii. for all such incidental, consequential and supplemental orders as are necessary to secure
that the business transfer scheme shall be fully and effectively carried out.37
The High Court may in its discretion confirm the business transfer scheme by granting an order in the terms applied for as above, or with modifications to the terms applied for, or refuse the application altogether.38 In the event, the application for the business transfer scheme is approved by the High Court, the High Court will fix a date that shall be applicable and known as the transfer date to which the transfer shall be effective thereupon and all assets and liability shall be vested in the transferee.39
Upon securing the approval from the High Court for the business transfer scheme, the transferor shall ensure that the order of High Court is published in at least two daily newspapers published locally in Malaysia and one of which must be in the national language and the other in English.40
As a final step, the transferor of the NPL asset is required within 30 days after the business transfer scheme effective transfer date, deliver any documents requested by Bank Negara Malaysia in relation to the transaction, deliver a certified High Court order together with Bank Negara Malaysia’s approval to the Registrar of Companies as well as any other relevant authority(ies) for example land offices.41
5. Bank Negara Malaysia Financial Sector Blueprint
As discussed above, Bank Negara Malaysia Guidelines issued in 2005 and 2007 requires financial institutions proposing to dispose their NPLs, inter alia, to only sell to locally incorporated companies to which the purchaser is majority owned by domestic shareholders as a result of foreign equity cap of 49%.42
In a recently released Financial Blueprint 2022-2026 by Bank Negara Malaysia revealed its plans to enhance the existing regulatory framework surrounding the disposal and purchase of NPLs. As per the Financial Blueprint 2022-2026, Bank Negara Malaysia opined that by removing the existing foreign equity limit cap of 49% to attract greater participation,
37 Section 104(1) Financial Services Act 2013 and Section 116(1) Islamic Financial Services Act 2013.
38 Section 102(3) Financial Services Act 2013 and Section 114(3) Islamic Financial Services Act 2013.
39 Section 102(4) and Section 104(2) Financial Services Act 2013 and Section 114(4) and Section 116(2) Islamic Financial Services Act 2013.
40 Section 105(1) Financial Services Act 2013 and Section 117(1) Islamic Financial Services Act 2013.
41 Section 105(2) Financial Services Act 2013 and Section 117(2) Islamic Financial Services Act 2013.
42 Supra at 26.
particularly international players, into the market. It is viewed that with a more diverse buyer market, financial institutions will be able to manage NPLs in a more efficient manner.43 The largest NPL acquiring firm in Southeast Asia, group chief legal officer, Premjit Singh, held that this move would certainly attract greater participation, thus creating transparency and competition in the industry. It would attract more international players with proven track record in managing NPLs as buyers in many different jurisdictions. This, in turn, would provide a greater comfort level to local, regional and international banks operating in Malaysia to dispose their NPLs.44
6. Conclusion
Based on the analysis above, it is evident that from a local perspective, Bank Negara Malaysia has played a crucial and important role in ensuring that NPLs definition is updated periodically to ensure compliance to international standards applied by European Banking Authority, Basel Committee of Bank of International Settlements, and International Monetary Fund.
In accordance to the market trend, as discussed above, it may be established that over the years we have seen that NPL sale by financial institution is gradually making a shift from an uncommon practice to a few leading financial institutions taking the lead and started the ball rolling. Further, with the expected NPL ratio’s hike after Covid-19 relief measures come to an end, it is anticipated by various industry players that more NPL sales would be observed in Malaysia.
In 2019, the then Assistant Governor of Bank Negara Malaysia opined that, a clear legal and regulatory framework will shorten the sale and purchase process, reduce the discount factor and improve the overall outcome of the NPL sale.45
Pursuant to the recent Financial Blueprint 2022-2026 by Bank Negara Malaysia, a positive inference could be established that there are incoming initiatives by the regulators to enhance the existing framework as discussed above. This is timely given the expected increase in NPLs as a result of Covid-19.
43 Adeline Paul Raj,”Bank Negara to remove restriction on sale of bad loans”, 14 February 2022, The Edge Malaysia
https://www.theedgemarkets.com/article/bank-negara-remove-restriction-sale-bad-loans
44 Ibid
45 Donald Joshua Jaganathan, Assistant Governor of the Central Bank of Malaysia, “Non-Performing Loan Resolution”, at the World Bank Regional Conference on NPL Resolution, Kuala Lumpur, 29 April 2019.